When management screws up and a company fails, follow the assets
Bellatrix Energy and Lightstream Resources are good examples, Creston Moly may turn out to be another
Bellatrix Energy was a large holding of mine. I was impressed by the quality of its assets but, like many, concerned about its exposure to a collapse in energy prices owing to the amount of debt it carried. But I held and the company failed, its assets being sold Return Energy, renamed Spartan Delta (SDE.TO). Undeterred by my $137,000 loss on the Bellatix holding, I bought a sizeable position in Spartan Delta. So far, by virtue of a $9.50 a share special dividend I have now earned over $1 million on the old Bellatrix assets (augmented, of course, by Spartan Delta’s purchase of Velvet Energy and sale of the bulk of those assets about a year later, plus the creation of spin-off Logan Energy, in which I have a position. Spartan Delta still has the Deep Basin assets it acquired for pennies on the dollar after Bellatrix failed, and they form a solid foundation for Spartan’s future.
My experience with Lightstream Resources was somewhat similar, taking a bath of almost $1 million when that company failed and its assets were sold to a private company, Ridgeback Resources. Ridgeback was recently acquired by Saturn Oil & Gas (SOIL.V) so I purchased a large position in Saturn. The jury is still out as to whether Saturn will turn into a positive investment for me, since I took the position only a short time ago after the news that Saturn had purchased Ridgeback, announced last February. The Ridgeback assets now figure prominently in Saturn’s self-desscription on its website which includes the following summary:
“In February 2023, Saturn acquired a private company, Ridgeback Resources Inc., increasing crude oil and natural gas production by 140% with the addition of over 17,000 boe/d (72% light oil and NGLs). The Ridgeback acquisition increased Saturn’s production in the Oxbow Asset in Southeast Saskatchewan by over 65%. The Ridgeback Acquisition also added three light oil development areas in Alberta, highlighted by the Cardium Asset with over 300 identified horizontal drilling locations.”
I did a valuation of Saturn using conventional methods (posted earlier here on Substack) and concluded the shares trading at about $2.40 a share were probably worth more like $10 a share based on today’s commodity prices and production volumes, and likely to grow from that base as the acquisition debt is paid off and capital is deployed to growth with (hopefully) free cash flow distributed to shareholders. We will see how that works out over time.
In the mining area (another area where commodity prices are volatile and debt poses risks) I took a bath on Mercator Minerals when that company failed owing to burdening its balance sheet with debt from acquisitions including the 2011 purchase of a copper-molybdenum miner called Creston Moly for $195 million. Molybdenum prices tanked, copper prices tanked, and Mercator failed and went into bankruptcy.
The Creston deposit looked mineable in the right commodity price environment and was sold to small-cap Starcore International (SAM.V) for $2 million which Starcore is now expanding through the purchase of some contigous properties to the deposit. With only 50 million shares outstanding and a market capitalization of only $5 million, it isn’t likely Starcore will build a mine at El Creston any time soon, but like all micro-cap mining companies, Starcore is doing the right thing by completing the NI 43-101 evaluation of the project and buying adjacent lands. If the copper prices remains firm (as many expect given the level of copper demand to meet the expected growth of the Electric Vehicle (EV) market, and molydenum prices firm up (now about $20 a pound, down from $40 a pound only a few months ago) there is an outside chance the deposit will attract the attention of a larger company and an acquisition of Starcore would be in the cards.
In any event, given its low prices, debt free status and small annual outpout of gold (about enough to cover expenses and keep the lights on) Starcore is a decent speculation so I bought 50,000 of the then 50 million shares of Starcore outstanding. It is unlikely this will produce a material gain for me but stranger things have happened and my potential loss of ~$5,000 is immaterial to me. A subsequent acquisition has increased the share count to about 75 million but I haven’t added shares, just put mine in a drawer to await developments related to the El Creston asset.
My point in this article is that valuation of commodity based companies should start and stop with a valuation of their reserves and an investment in those companies even when apparently undervalued should always recogize that debt ridden resource companies are high risk regardless of their multiples of cash flow or Enterprise Value to EBITDA ratios.